Roche's Competitive Advantage

| About: Roche Holding (RHHBY)
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Roche Holdings (OTCQX:RHHBY) has managed to grow its revenues and earnings at an impressive rate, whereas other big pharmaceutical firms have suffered due to several major drugs losing patent protection. Roche has distinguished itself due to its focus on biotechnology research and development (R&D) and leadership in oncology (cancer therapeutics). Given that the R&D productivity has declined over the years as far as small molecules are concerned, and the fact that there is a visible shift towards targeted therapies, Roche stands to gain. In this analysis we'll look at Roche's competitive advantage and how it fits in the shifting pharmaceutical landscape.

Our price estimate for Roche stands at $36.80, which is roughly inline with the market price.

Dominance In The Growing Cancer Market

Roche has one of the strongest and most profitable drug portfolios in cancer therapeutics market. Three of its major drugs Rituxan/MabThera, Avastin and Herceptin are used for treating a variety of cancer forms including blood cancer, breast cancer and colorectal cancer. The combined sales from these drugs stood at over CHF 19.28 billion in 2013, or roughly $21.8 billion at the current exchange rate. This accounted for around 53% of Roche's total pharmaceutical revenues during the year. Additionally, its total oncology (cancer therapeutics) sales constituted roughly 62% of its pharmaceuticals business which clearly showcases Roche's success in this area. Despite the fact that individual sales of Rituxan/MabThera, Avastin and Herceptin stood between $6.8 and $7.8 billion, their growth was still healthy. Avastin saw its revenues jump by 13% in 2013 due to its demand for the treatment of ovarian cancer in Europe and increased use for colorectal cancer in both, Europe and the U.S.

The opportunity in oncology comes from the fact that global incidence of cancer is expected to increase from about 12.7 million in 2008 to 21.3 million in 2030. In addition, the number of deaths is likely to show a similar growth trajectory as depicted in the chart below. Treating cancer can be tricky as it is a not a single disease, and has more than 200 types and thousands of subtypes affecting more than 60 organs. This means that the medicines have to be very specific and targeted. Being the biggest biotech firm in the world with a strong technical know-how, Roche has developed several biologics to treat cancer. Unlike small molecule drugs, biologics tend to be more targeted and attach themselves to specific cell receptors associated with the disease process.

Biologics Are The Way To Go As Small Molecule Drug R&D Productivity Declines

Roche has maintained strong focus on biotech research and development (R&D), especially since its acquisition of Genentech. In both absolute terms and as a percentage of revenues, it spends more amount on R&D activities as compared to its competitors such as Pfizer (NYSE:PFE), Merck (NYSE:MRK) and Johnson & Johnson (NYSE:JNJ). The company currently has 14 biopharmaceutical drugs in the market and another 39 investigational biopharmaceuticals in its drug pipeline. Additionally, seven of its 10 highest selling drugs are biopharmaceuticals. Given that R&D productivity has declined for small molecule drugs over the last few years, biologics may be the way to go. The shift is clear as 71% of the revenue generated by top 10 drugs in 2012 came from biotech products.

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